Late Ramesh Maganlal Shah and Prakash Damodar Kamat founded Fine Organic Industries in early 1970 at Mumbai, which was registered in 1973 as a partnership firm. It commissioned its first facility in Dombivli MIDC Industrial Area in 1973, which carried out processing and supply of food additives in Gujarat and Maharashtra. In 1975, Mukesh Maganlal Shah joined the partnership firm and expanded the business across India.

Fine Organics Industries is the largest manufacturer of oleo chemical-based additives in India and a strong player globally in this industry. It produces a wide range of specialty plant derived oleo chemicals-based additives. As on March 31 2018, the company had a range of 387 different products sold under the Fine Organics brand and used in the plastic industry, food industry and other (cosmetics, printing inks, coated papers, lube additives, wires and cables, coatings and other specialty applications) industries. It is the first company to introduce slip additives in India and is the largest producer of slip additives in the world.

In the 12 months ended March 31, 2018, it had 631 direct customers (i.e., end-users of products) and 127 distributors (who sold products to more than 5,000 customers) from 69 countries. Its direct customers are multinational, regional and local players manufacturing consumer products, such as Hindustan Unilever and Parle Products, and petrochemical companies and polymer producers globally.

The company currently has three production facilities- Ambernath Badlapur and Dombivli in Maharashtra having a combined installed capacity of approximately 64,300 tonne per annum as on December 31, 2017.

The company products are also manufactured on a job-work basis by Olefine Organics, a partnership firm and a Promoter Group entity, at a manufacturing facility in Ambernath, Maharashtra. The second Ambernath facility is situated on a plot of land that MIDC currently leases to Olefine. Fine Organcis Industries has entered into a leave and license agreement for the land with Olefine for a term of three years effective March 26, 2018. The company plans to take over the operation of the second Ambernath facility as Olefine has received the approval to enter into a sub-lease with Fine Organics Industries from MIDC pursuant to a letter dated May 21, 2018. As at December 31, 2017, the second Ambernath facility had an installed capacity of approximately 5,000 tonnes per annum.

The company is currently planning to set up an additional production facility in Ambernath with a planned installed capacity of 32,000 tonne per annum, which it expects to commence operations in the fourth quarter of Fiscal 2019. In addition, the company is planning to set up a new production facility in Leipzig, Germany with a planned initial installed capacity of 10,000 tonnes per annum, which it expect to commence operations in the third quarter of Fiscal 2020. This facility will be owned and operated by a joint venture company (which they plan to name FineAdd Ingredients GmbH, in which it will have 50% equity interest.

The company is also in the preliminary stages of planning the development of two additional production facilities: one in Patalganga (Maharashtra) with a planned initial installed capacity of approximately 10,000 tonne per annum and one in Ambernath (Maharashtra) for which it is awaiting possession of the land and have yet to decide on the planned initial installed capacity.

The company is planning to diversify and strengthen its business by manufacturing and distributing premixes for bakery and confectionary products and pan release agents. Fine Zeelandia Private Limited, a joint venture company in which it have a 50% equity interest, is in the process of setting up a new manufacturing facility in Patalganga to manufacture these products. This new facility has planned initial installed capacity of 10,000 tonnes per annum and expects it to commence operations in the first quarter of FY 2019.

The company has a dedicated research and development (R&D) centre located in Mahape, Navi Mumbai. It has developed several new products, such as Acetem, Datem and Lactem, and processes, such as in-house technology for the production of fatty amides for the polymer industry. The company is currently conducting research and development for new products such as fatty amines, polyglycerols and guerbet alcohols and new organic anti-block 52 additives and new additives to make plastics biodegradable. It is also conducting research into new technologies for chemical processing to minimize energy costs.

The Offer and the Objects

The offer comprises of offer for sale of 76,64,994 equity shares by the promoter, which at lower price band of Rs 780 per share, works out to Rs 597.87 crore and at higher price band of Rs 783, the issue size works out to Rs 600.17 crore.

The offer will constitute 25.00% of the post offer paid-up equity share capital of the company

Strengths

Manufacturing plant-based additives from base oleochemicals is a highly specialized process. Hence, many of these additives are specialty products, and this industry enjoys premium margins with only a few players dominating the industry globally. Proprietary technology to manufacture these specialty additives is available with only a few global players. The company is one of the leading players that developed proprietary technologies to manufacture the green additives. There are only a few large players in the global oleochemical-based additives industry. This is due to multiple entry barriers, such as product formulations, process technology and customer stickiness to established players. None of the company's major competitors are based in India. Lengthy, expensive customer product approval process and innovative technology restrict smaller and new players from entering the additives industry as they have to wait for 3-5 years to supply their products on a commercial basis.

The company has developed in-house process design expertise to construct its production facilities. This gives scale advantages by enabling the timely expansion of its capacity in response to market needs and reduce capital expenditure costs for expansions compared to other players.

In CY 2016, overall global food emulsifiers market size was estimated to be US$ 2.8 billion. The global food emulsifiers market size is expected by to reach US$ 3.4 billion by CY 2021 by growing at CAGR of 4.1% over CY 2016- CY 2021. Indian food emulsifiers market size is estimated to be Rs 500-600 crore in 2016. Going forward, between CY 2016 and CY 2021, the Indian food emulsifiers market size to reach Rs 900 crore by CY 2021 by growing at 10-12% CAGR driven by healthy growth in convenience and packaged food segments, especially the premium food segments.

In CY 2016, the overall global plastic additives market size was estimated to be US$22 billion. The global plastic additives market size is expected by to reach US$ 30 billion by CY 2021 by growing at CAGR of 6% over CY 2016- CY 2021. Indian plastic additives market size is estimated to be Rs 5500-6000 crore in 2016. Going forward, between CY 2016 and CY 2021, the Indian plastic additives market size to reach Rs 9000 crore by CY 2021 by growing at 8%-10% CAGR driven by current low per capita plastic consumption, strong growth in major consumer segments: auto, construction, consumer durables and increasing use of plastics in packaging: superior quality and cost-effectiveness

Weaknesses

Domestic vegetable oil prices depend on global demand-supply dynamics as well as domestic output. Duty changes (by the Indian government and exporting countries) can result in price fluctuations, and hence volatility in demand. Climatic changes and a weak monsoon could impact production of oilseeds as well, and consequently supply. Also, foreign exchange rate volatility impacts prices in the short term.

Some long-term agreements for the sale of products contain a meet-or-release provision, i.e., a provision pursuant to which a purchaser may terminate the agreement if the company does not agree to meet any lower offers that the purchaser receives from other suppliers. Some of long-term agreements stipulate fixed prices for products. Some of long-term agreements stipulate that there are no minimum purchase obligations on its customer(s).

Some of group companies (Oleofine Organics Sdn Bhd-Malaysia and Oleofine Organics (Thailand) Co) are in the same line of business as Fine Organics.

Valuation

For FY 2017, net sales were up 19% to Rs 778.2 crore. The OPM stood at 18.7% which fell by 360 bps leading to a flat OP to Rs 145.44 crore. Other income stood at Rs 4.41 crore down by 57%. Thus, PBIDT was down by 4% to Rs 149.85 crore. Interest cost was down by 45% to Rs 4.57 crore and depreciation was lower by 20% to Rs 23.71 crore. Thus, PBT stood at Rs 121.57 crore up by 3% YoY. After paying total tax of Rs 43.21 crore, PAT stood at Rs 78.36 crore, up 2%.

For the nine months ended December 2017, net sales stood at Rs 580.97 crore with OPM of 17.9% resulting in an OP of Rs 104.26 crore. Other income stood at Rs 8.78 crore. Interest cost was at Rs 3.02 crore and depreciation stood at Rs 14.63 crore thus resulting in PBT of Rs 95.4 crore. After providing for total tax of Rs 34.45 crore, PAT stood at Rs 60.95 crore.

At higher price band of Rs 783, the P/E on FY 2017 EPS (on current diluted equity of Rs 15.33 crore) of Rs 25.3 works out to 30.6. Over the last three years (FY 2014-FY 2017), sales have grown at a CAGR of only 11% and net profit has grown at a CAGR of only 8%.

Galaxy Surfactants, nearest comparable listed player focused on surfactants and other speciality chemicals for the personal- and home-care industries with consolidated net sales of Rs 2433.91 crore and net profit of Rs 158.03 crore is currently trading at P/E of around 28.6 times FY 2018 EPS of Rs 44.6